Restraining Government in America and Around the World

Responding to Paul Krugman and Ezra Klein

I seem to have touched a raw nerve with my post earlier today comparing Reagan and Obama on how well the economy performed coming out of recession. Both Ezra Klein and Paul Krugman have denounced my analysis (actually, they denounced me approving of Richard Rahn’s analysis, but that’s a trivial detail). Krugman responded by asserting that Reaganomics was irrelevant (I’m not kidding) to what happened in the 1980s. Klein’s response was more substantive, so let’s focus on his argument. He begins by stating that the recent recession and the downturn of the early 1980s were different creatures. My argument was about how strongly the economy rebounded, however, not the length, severity, causes, and characteristics of each recession. But Klein then cites Rogoff and Reinhardt to argue that recoveries from financial crises tend to be less impressive than recoveries from normal recessions.

That’s certainly a fair argument. I haven’t read the Rogoff-Reinhardt book, but their hypothesis seems reasonable, so let’s accept it for purposes of this discussion. Should we therefore grade Obama on a curve? Perhaps, but it’s also true that deep recessions usually are followed by more robust recoveries. And since the recent downturn was more severe than the the one in the early 1980s, shouldn’t we be experiencing some additional growth to offset the tepidness associated with the aftermath of a financial crisis?

I doubt we’ll ever know how to appropriately measure all of these factors, but I don’t think that matters. I suspect Krugman and Klein are not particularly upset about Richard Rahn’s comparisons of recessions and recoveries. The real argument is whether Reagan did the right thing by reducing the burden of government and whether Obama is doing the wrong thing by heading in the opposite direction and making America more like France or Greece. In other words, the fundamental issue is whether we should have big government or small government. I think the Obama Administration, by making government bigger, is repeating many of the mistakes of the Bush Administration. Krugman and Klein almost certainly disagree.

17 Responses

I’m impressed and appreciate your response to Prof. Krugman’s objections, but you seem to have missed the point.

Let me clarify.

In your post, you seem to initially agree with Rogoff-Reinhart that “recoveries from financial crises tend to be less impressive than recoveries from normal recessions”, which as you affirm is quite a reasonable expectation and likely backed up by compelling data in R-R’s book. Yet, within one sentence, you manage to completely abandon the hypothesis with this sweet one liner:

“… but it’s also true that deep recessions usually are followed by more robust recoveries.”

No. You can’t have it both ways. One of these statements has to be false. Recoveries from severe financial crises either bounce up quickly or they do not.

I don’t know about you, but to my eye, it looks like recent recessions (2001 and 1990) have been distinctly characterized by a slow recovery in job growth, so why should we expect this recession to be any different? In fact, the current great recession is recovering at a comparable rate to the 1980’s recovery. It’s just that this recession had a bigger downturn (6% vs 3% increase in unemployment), so the same level of job growth has a smaller impact.

Paxz, your argument is valid in only certain respects. The reason that the large increase in unemployment was so pronounced under Obama was of course due to a crash in the already government filled system. All the erosion that came from the false housing boom, that derived mainly from the fed’s manipulation of the money supply with low interest rates, made the default swaps look like a corrupt mechanism in the stock market. What Mr Mitchell argues is that government is the false solution to a terrible problem, which only prolongs the problem. Bush tried stimulating the crashed economy with government money, and Obama could have increased employment as quick as Reagan did had he slashed government by a much more significant amount. If you take a look at the analysis, Reagan’s boost in GDP, and consistent growth in GDP resulted in more jobs being created.

Of course unemployment is a lagging indicator, so if Obama understood the long term economic effects of government intervention, he would not have dare attempted his government stimulus. Even if his case is that FDR put people back to work quickly and stimulated the economy with government intervention which is absolutely not the case:

Keynesianism is Obama’s idea of stimulating the economy, but the long term result of boosting aggregate demand with stimulus is prolonged unemployment and an increase in government jobs. This is surely socialist and gives a faux idea of what true job creation is. Overall, you need to look closer at economic mechanisms, and rely less on something as stifle as that petty graph. What did occur in the economy, was a large crash, but a quick stimulant was seen under Reagan’s removal of government mandates, as opposed to Obama’s stimulus. Many people have claimed a dire long term unemployment scenario, all of which occurred during FDR’s term until he removed certain government regulations. Of course one can speculate the differences in scenarios of time and impact of economic downfall, yet what is true is that Reagan saw many private jobs and much gdp growth.

You seem to have a difficult time with ideas like proportions and rates – basic physics stuff. Linear growth vs. exponential growth. How about, what happens to velocity with an increasing rate of acceleration? Wait…think about it.

Let’s get some basics under your belt before challenging the brightest people in the world.

I always try to get two sides of an argument on complex issues, so I was intrigued to see a link here that claimed to respond to Dr. Krugman’s recent blog post. But I was disappointed by the lack of response to his direct arguments. Dr. Krugman specifically points out that the 1981-82 recession was deliberately created by Volcker & the Fed to bring down inflation, and the economy sprang back after the Fed thought the country had enough. He points out that much of the rebound had to do with a pent up demand for new housing that resulted from the high interest rates, whereas today we remain overbuilt, if anything.

But this line particularly disappointed me: “My argument was about how strongly the economy rebounded, however, not the length, severity, causes, and characteristics of each recession.” I don’t see how one can call it analysis if you dismiss ALL the contributing factors and fixate on such a simplistic idea: that big recessions are generally followed by big recoveries. What is to be learned from that? History certainly shows there were enough examples to the contrary to invalidate this generalization.

[…] Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable attack. Now it’s time to address Derek Thompson’s critique on the Atlantic’s site. At […]

[…] Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable attack. Now it’s time to address Derek Thompson’s critique on the Atlantic’s […]

[…] sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued an critique focusing on the […]

[…] sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the […]

[…] sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued an critique focusing on the […]

[…] Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable attack. Now it’s time to address Derek Thompson’s critique on the Atlantic’s […]